The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Information Barriers

  • From Vol. 7 No.5 (Feb. 6, 2014)

    How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part Four of Four)

    This is the fourth article in our four-part series on information barriers in the hedge fund context.  The series aims to help hedge fund managers determine whether they should use information barriers and, if so, how they can establish and enforce such barriers.  In particular, this fourth article discusses the role of employee training and compliance surveillance in the maintenance of robust information barriers, and describes four significant challenges faced by hedge fund managers in structuring, implementing and enforcing information barriers.  The first article provided an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; described four principal benefits available from the use of information barriers; highlighted the types of firms that can benefit most from the implementation of information barriers; and described the types of firms that will find the implementation of information barriers most challenging.  The second article discussed the legal and regulatory basis for information barriers and described the building blocks of effective barriers (including the key players, physical components and technological processes).  The third article described how a firm can limit access to material nonpublic information within the information barrier control environment and outlined policies and procedures designed to bolster the effectiveness of information barriers.

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities

    On February 4, 2014 – this coming Tuesday – the New York office of Ropes & Gray will host GAIM Regulation 2014.  The event will feature an all-star speaking faculty including general counsels and chief compliance officers from leading hedge fund managers, top partners from Ropes and other law firms and officials from the SEC, CFTC, FINRA and other U.S. and global regulators.  The intent of the event is to share best practices in a private setting, and to hear directly from relevant regulators.  For a fuller description of the event, click here.  To register, click here.  The Hedge Fund Law Report recently interviewed three Ropes partners on some of the more noteworthy topics expected to be discussed at GAIM Regulation 2014.  Generally, we discussed SEC and regulatory issues with Laurel FitzPatrick, co-leader of Ropes’ hedge funds practice and co-managing partner of its New York office; CFTC and derivatives issues with Deborah A. Monson, a partner in Ropes’ Chicago office; and enforcement issues with Zachary S. Brez, co-chair of Ropes’ securities and futures enforcement practice.  Specifically, our long form interview with these partners included detailed discussions of the future of hedge fund advertising following the JOBS Act; the impact of the Volcker rule on hedge fund hiring and trading; fund manager responses to the SEC’s focus on broker registration of in-house marketing personnel; best practices for preparing for and navigating SEC examinations; structuring multi-year incentive fees; the impact of swap execution facilities on hedge fund manager obligations and cleared derivatives execution agreements; recent National Futures Association developments relevant to hedge fund managers; design and enforcement of robust information barriers; measures that managers can take to preserve the firm before and after initiation of an enforcement action; government enforcement priorities for hedge fund managers; and specific financial products likely to face government scrutiny in the next two years.

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part Three of Four)

    This is the third article in The Hedge Fund Law Report’s four-part series on information barriers in the hedge fund context.  Generally, the series explores why hedge fund managers might want to implement information barriers and identifies best practices for doing so.  Specifically, this third article describes how a firm can limit access to material nonpublic information within the information barrier control environment and outlines policies and procedures designed to bolster the effectiveness of information barriers.  The first article in this series provided an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; described four principal benefits available from the use of robust information barriers; highlighted the types of firms that can benefit most from the implementation of information barriers; and described the types of firms that will find the implementation of robust information barriers most challenging.  The second article discussed the legal and regulatory basis for information barriers and described the building blocks of effective information barriers (including the key players, physical components and technological processes).  The fourth article will discuss the benefits of training and compliance surveillance related to information barriers and describe the four most significant challenges faced by hedge fund managers in structuring, implementing and enforcing robust information barriers.

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  • From Vol. 7 No.3 (Jan. 23, 2014)

    How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part Two of Four)

    This is the second article in The Hedge Fund Law Report’s four-part series on information barriers in the hedge fund context.  Generally, the series explores why hedge fund managers might wish to implement information barriers and identifies best practices for doing so.  Specifically, this second article discusses the legal and regulatory basis for information barriers and describes the building blocks of effective information barriers (including the key players, physical components and technological processes).  The first article provided an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; described four principal benefits available from the use of robust information barriers; highlighted the types of firms that can benefit most from the implementation of information barriers; and described the types of firms that will find the implementation of robust information barriers most challenging.  See “How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading?  (Part One of Four),” The Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).  The third article will describe how a firm can limit access to material nonpublic information within the information barrier control environment and outline policies and procedures designed to bolster the effectiveness of information barriers.  And the fourth article will discuss the benefits of training and compliance surveillance related to information barriers and describe the four most significant challenges faced by hedge fund managers in structuring, implementing and enforcing robust information barriers.

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  • From Vol. 7 No.2 (Jan. 16, 2014)

    How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading?  (Part One of Four)

    Insider trading law is rife with counterintuitive presumptions.  Notable among them is the presumption that if one employee of a hedge fund management company receives material nonpublic information (MNPI), all employees of that management company are in possession of MNPI for insider trading purposes, and any trade in the subject security will be “on the basis of” that information.  See “Hedge Funds in the Crosshairs: The Law of Insider Trading in an Active Enforcement Environment,” The Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010).  However, that presumption can be rebutted by the presence of well-designed information barriers.  An information barrier, in this context, is a set of physical, operational, legal and technological structures and processes used to prevent the flow of information from one part of a firm to another, thereby preserving the ability of one part of the firm to trade securities that another part of the firm may not trade.  For example, assume that a single manager has a distressed debt fund that trades bank debt and a separate high-yield credit fund that trades bonds.  If the investment team for the distressed debt fund receives nonpublic earnings projections of an issuer based on service on that issuer’s creditor committee, the investment team for the high-yield credit fund would be prohibited – as a default – from trading in the public bonds of the same issuer because the whole firm would be presumed to be in possession of MNPI of that issuer.  However, if the firm had implemented a legally sufficient information barrier between the distressed debt and high-yield credit fund teams prior to receipt by the distressed fund team of MNPI, the high-yield credit fund team would still be able to trade public bonds of the issuer, even after receipt by the distressed fund team of MNPI.  This legal issue matters to investment performance because a good and legitimate investment opportunity may arise anytime.  In the foregoing example, the high-yield credit fund team may wish to purchase bonds of the issuer based on immaterial or public information received after the receipt of MNPI by the distressed fund team.  In the presence of a legally sufficient information barrier, the high-yield credit fund team would be able to execute on the opportunity.  Absent such an information barrier, the high-yield credit fund team would have to forego the opportunity or assume heightened insider trading risk.  Implicit in the foregoing hypothetical is the notion that an information barrier is useful to the extent that it is legally, operationally and otherwise sufficient.  Which of course begs the question: How can a hedge fund manager structure, implement and enforce sufficient information barriers?  This is the first article in a four-part series that aims to answer this question, or at least provide the rudiments of an answer and direction for further analysis.  In particular, this article provides an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; describes four principal benefits available from the use of robust information barriers; highlights the types of firms that can benefit most from the implementation of information barriers; and describes the types of firms that will find the implementation of robust information barriers most challenging.  The second article in this series will describe the regulatory environment surrounding the use of information barriers and discuss the building blocks of an effective information barrier control environment.  The third installment will describe how a firm can limit access to MNPI within the information barrier control environment and outline policies and procedures designed to bolster the effectiveness of information barriers.  The fourth installment will discuss the benefits of training and compliance surveillance related to information barriers and describe the four most significant challenges faced by hedge fund managers in structuring, implementing and enforcing robust information barriers.

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